Bank of Korea Holds Key Rate at Record Low, Cuts Growth Forecast

  • Follows surprise move to reduce borrowing costs last month
  • Governor Lee says monetary policy to remain accomodative

South Korea’s central bank held its benchmark interest rate at a record low on Thursday while cutting its projection for growth and inflation amid uncertainty to the economic outlook.

The seven-day repurchase rate was left unchanged at a record low 1.25 percent, as forecast by all 20 economists in a Bloomberg survey. The central bank lowered its estimate for gross domestic product expansion this year to 2.7 percent, from an April projection of 2.8 percent. It trimmed its view on consumer price gains to 1.1 percent from 1.2 percent.

Governor Lee Ju Yeol, who surprised markets in June with a rate cut, said Thursday’s decision was unanimous and that monetary policy will remain accommodative. Lee said the cut in this year’s growth forecast reflected risks from the U.K. exiting the European Union and the hit to consumption expected from the implementation of an anti-corruption law.

“The downward revision of growth and inflation was smaller than expected, and it seems Lee considered that the government announced fiscal stimulus plan,” said Yoon Yeo Sam, a Seoul-based fixed-income analyst at Mirae Asset Daewoo Securities. “Expectations for another rate cut won’t fade easily as external uncertainties remain high, and I forecast another cut in September.” 

In a statement released Thursday, the BOK said it will closely monitor household debt and any changes in the monetary policies of major countries. It said uncertainties to the growth path for Korea are high and that it will watch the progress of corporate restructuring. The central bank also said inflation will remain at a low level for the time being and then gradually rise as the effects of low oil prices diminish.

In a separate briefing on inflation, Lee said he expects price gains to approach the 2 percent target in the first half of 2017, and said that while the inflation target is an important policy to manage price expectations, it is not something that should be achieved by any means.

Lee held the second briefing to explain why consumer price index hadn’t approached a 2 percent rise in the first six months of this year. When they announced the new price target for 2016-2018, the bank promised to explain to the public if inflation trailed the target for six months by a set amount.

The won strengthened after the interest-rate decision and at 2:40 p.m. in Seoul traded at 1139.15 per dollar, up 0.6 percent from Wednesday’s close. Korea’s three-year government bond yields fell one basis point to a record 1.2 percent, Korea Exchange prices show.

Job Creation

The Korean government announced a 10 trillion won ($8.7 billion) supplementary budget last month, mainly to create jobs and aid regional economies that will be hurt by the restructuring. Data released Wednesday showed the jobless rate in South Gyeongsang province, where shipbuilders and shipping companies are located, rose the most among the country’s regions, and the pace of job creation in manufacturing slowed considerably.

Expectations for further BOK easing in the near future remain high, with NH Investment & Securities Co., Goldman Sachs Group Inc., and SG Securities Co. among those projecting a cut to 1 percent this year. The reduction, if realized, would put Korea’s policy rate at what the economists see as the lower limit for now.

Recent economic data have shown signs of slight improvement, although it remains in doubt whether the trend will continue. Exports fell 2.7 percent in June from the previous year, the smallest drop in a year, and industrial output for May expanded more than expected. Yet the finance ministry said in a monthly economic assessment report that the slowdown in job creation and a delay in sentiment improvement will limit the economic recovery.

“The BOK’s revisions to its economic outlook look optimistic to us,” Kwon Young Sun, a Hong Kong-based economist for Nomura Holdings Inc., wrote in a report after the decision. “We believe that weaker international trade volumes, falling domestic business investment and a cooling housing market will more than offset,” any positive impact from fiscal stimulus, he said. Kwon expects two more rate cuts to 0.75 percent this year.

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